Watch out for the tax consequences of sending your fleet of trucks home with your employees.
Does your septic service business have a fleet of company-owned service trucks?
Dumb question! Of course it does.
Do you cover a sizeable territory — larger than a small town, say? Chances are pretty good the answer to that is “yes,” too.
And do some of your employees drive their service trucks home after work — at least sometimes — so that the next morning they can drive straight to the day’s first job without stopping at the shop?
If your response is another “yes” — well, no surprise there. Especially if your business reaches beyond your city limits, or even crosses county lines, and if your workforce is just as far-flung as your customers, that sounds like a commonsense practice.
Say that your technician lives 15 miles away in the next town and the first customer on tomorrow’s calendar lives in that very same community. Isn’t it smart scheduling to send Frank to that homeowner right away?
If your driver doesn’t first have to travel to the shop, get in his service truck and drive back, he could be at the customer’s home up to a half-hour earlier. It can be a great way to save your customers money and help your business maximize the number of service calls you can make in a day.
Many contractors may take this practice for granted. If you’re one of them, pay close attention: You need to make sure you’re doing it right so that the IRS doesn’t come back to bug you. Yes, it’s an obscure problem, but that doesn’t make it any less real. As with many wrinkles in the tax code, what you don’t know can hurt you.
On the bright side, careful but fairly straightforward recordkeeping can solve the problem without dropping the basic practice.
DEDUCTIBLE OR NOT?
Tax attorney Patricia Hintz, a partner at Quarles & Brady in Milwaukee, counts many small businesses among her clients, and small-business ownership runs in her family.
Hintz was explaining the broader tax issue of how company vehicles get used day to day when this specific subject came up. “Vehicles are a real hot-button issue,” she says. Company fleet vehicles are no exception.
Whether we’re talking about a company-owned vehicle or a private vehicle that an employee uses on the job, issue No. 1 is this, says Hintz: The only tax-deductible miles are the ones driven for work. Commuting miles don’t count.
A simple example: Suppose you, the business owner, drive a car owned by your company. During the day you drive it to meetings with clients, to check on your work crews at their job sites, and more.
All those on-the-job miles are legitimate business miles. They qualify for a deduction on your business federal tax return. (The same is true if you don’t have a company car but simply make those trips with your personal vehicle; the only difference is that the deduction for the mileage would be made on your personal income tax return — not the one your business files.)
But some miles you drive every day aren’t deductible — either in the company car or in your personal car: the miles you commute back and forth from home to work. IRS rules treat those as personal miles.
See how this can get complicated with service fleet vehicles?
Suppose your next-town-over employee drives a service truck home from the shop at the end of every day, and drives back to the shop first thing every morning.
Those are commuting trips. Your company can’t treat them as business mileage even though they’re driven in your business service truck.
But remember — one of the reasons you and many service contractors permit employees to drive service vehicles home is so they can go straight to that first job — and, in all likelihood, home from the day’s final job.
In that case, the very first leg of the day from the employee’s house to the first customer’s location should be counted as commuting miles and therefore not tax deductible for your business (the truck’s owner). The same is true for the last leg of the day: The miles driven from the last customer to the employee’s home are nondeductible commuting miles.
All the other miles in between, from the first customer to the shop to every other job of the day and to the last customer, are legitimate, deductible business miles.
So you need to make sure your employee differentiates between those first and last nondeductible commuting legs and all the other deductible travel during the day in performing the job.
But here’s another wrinkle: The gas that the tech uses to drive from home to work and back every day. If you’re not charging the employee for it, that’s a form of income that must find its way onto your employee’s annual W2 form come tax time.
You could charge it back to your employee, but do you really want to send a message that makes you, the boss, look money-grubbing? Psychologically, if for no other reason, it’s better just to add it to the employee’s income statement. It’s probably easier to manage your records that way, too.
A bigger headache can arise when employees make personal use of the company vehicle on their own time. If you don’t capture those costs, they risk turning into a black hole. And once again, they need to be included in the employee’s income statement.
Mileage records are essential for those nonbusiness uses, Hintz advises. Better yet, set strict rules on how employees use the vehicle off-hours.
Still another complication involves on-call policies. For an employee who is on call overnight and so drives the service vehicle home, that might not count as commuting, Hintz notes. The key will be exactly how your on-call responsibilities are worded, among other things.
Ultimately, you’ll need to consult with your lawyer and tax professional to draw up clear policies and procedures about how and when your employees take your service vehicles home.
KEEP GOOD RECORDS
Make sure there is clear recordkeeping and consistent application of the rules. And make sure you keep good records. Numerous smartphone apps can keep personal or business mileage records. If your techs use smartphones on the job, it’s worth investigating which of these tools might best help your business easily keep records and transfer them to whatever form you need for your annual business tax return.
By taking care to cross those t’s and dot those i’s, you can reap the benefits of flexibility and efficiency that come with enabling employees to take service trucks home for a legitimate business purpose.
And you can do so without getting tied up in tax knots.